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Money Talks

By Dr. Gregg Dimkoff
Professor, Grand Valley State University
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Once a person is an engineer, he or she is always an engineer, always thinking about how to solve problems, how to minimize them, or how to avoid them altogether. I was a chemical engineer early in my career, and still consider myself to be one. One of the first engineering lessons I learned is that virtually any problem can be solved given the will to do so, enough time and enough knowledge. And so it was with the BP oil well explosion off the coast of Louisiana last spring.

Unlike many people I talked with, I never had any doubt BP would be able to fix the leaking well. BP certainly had several teams of engineers working on different solutions and running computer simulations for proposed fixes. BP’s approach was classic engineering: try something that ought to fix the problem, and if it doesn’t, figure out why, alter the approach and try again. Eventually it worked.

Now that I make my living as a finance professor, not much has changed from my engineering days. There are financial and economic problems in need of solutions, tons of data — much of it conflicting — and as professors, we develop solutions to problems affecting financial markets and the economy. Like BP, if we are wrong, we use that new knowledge to develop different approaches. The overlap in the skills needed to be a good engineer or a good finance professor is considerable. It’s no coincidence that the majority of finance Ph.Ds has an undergraduate degree in math, science or engineering.

BP’s approach to cap its leaking well is similar in many ways to the nation’s approach for ending the recession. Most of BP’s attempts to cap the well reduced the oil flow, but didn’t stop the leak. The amount of leaking oil continued to decrease until the well was capped. Congress used a similar approach, enacting program after program to stop the recession, and each helped a little. Nevertheless, the unemployment rate remains above 9 percent, the rate of economic growth has been falling all year and the future still looks scary.

We can look back at our efforts to end the recession and see many reasons for failure. It’s becoming apparent that those who said we couldn’t spend our way out of a recession were right. Sort of. The problem is how we spent much of the money. Much of it was given away in ways that only sped up future spending to the present. The Cash for Clunkers program induced the nation’s middle class to replace their older vehicles — something most would have done anyway — and then destroyed several million working vehicles. The average price of used cars rose to an all-time high in August, punishing both low-income workers and auto manufacturers whose new car sales fell big time this past summer. The middle class could laugh all the way to the bank over their gift, except that many of their banks have also failed.

Likewise, tax rebates for individuals who buy new household appliances and the $8,000 tax rebate for first-time homebuyers helped the economy only in the short-term. Again, present sales were juiced up at the expense of future sales and only a few favored industries were helped.

These efforts to end the recession seem similar to the ancient Chinese proverb, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” In other words, giving people money in the form of rebates helps for a short time, but unless they invest the money in productive long-term investments, the long-term benefits needed to get us out of the recession are minimal.

Many economists blame the recession — already the third longest in U.S. history — on failed Keynesian economics. John Keynes, the famous London economist, was a proponent of increased government spending and tax cuts to end recessions. Congress certainly did the spending, but not very productively. Spending on road repairs and improvements to the country’s electric power transmission grid will benefit us for years and years. Such spending, however, has been a drop in the bucket of total government stimulus.

More importantly, Congress has ignored the other part of what Keynes recommended: tax cuts. In fact, business and individual tax cuts have been a major tool used to get us out of prior recessions. They worked, and they worked well. Unlike trying to spend our way out of a recession, tax cuts have the potential to help every industry, not just the chosen favorites. The Democrat’s talk about increasing taxes while the economy is stalling out is ludicrous. Like BP and its oil leak, Congress tried many approaches to end the recession. They helped a little, but now it’s time to try what has always worked in the past: across-the-board tax cuts.

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